Professional Ethics, Conflicts, and Other Considerations for Audit Firms

In light of the current scrutiny surrounding global conglomerate consulting firms and their ethical, governance, and confidentiality issues, it is pertinent to provide an overview of their history, global presence, and the risks associated with their auditing practices. Our intention is not to comment on the ongoing matters concerning client confidentiality but rather to focus on the structural challenges faced by these entities due to their size and reach. Finally, we aim to set out how we at LNP strive to minimise risks for both our staff and clients through our organisational structure and service offerings.

Historical Background and Audit-Related Issues

Originally, the large global conglomerate consulting firms emerged as accounting and auditing firms, expanding into global behemoths as they surpassed the accounting and audit markets in which they initially operated. To sustain their growth, these firms diversified their service offerings. In the 1960s, approximately ten major firms primarily provided accounting and auditing services. By the 1980s, this number reduced to eight, with the emergence of non-accounting and audit services. During the 1990s, through a series of mergers, the number of firms further dwindled to four, who audited a significant majority of listed companies globally. In their quest for expansion, these firms engaged in a spree of mergers and acquisitions. Presently, their combined revenues amount to approximately US$200 billion (2021), and they employ well over a million individuals. To provide perspective, Apple reported revenues of US$365 billion in 2021.

Current Landscape

These global conglomerate consulting firms now offer a wide array of diverse services, encompassing legal, consulting (such as risk, strategy, digital transformation, IT services), public relations, human resources, environmental, social, and governance (ESG) services, insurance and actuarial services, corporate finance, investment management, and numerous outsourced services. Their client base spans across industries and countries worldwide, with most global governments utilising their expertise to design crucial programs, including taxation and IT systems. Undoubtedly, their size, reach, and influence are truly immense.

However, auditing now represents a small fraction of their services, comprising less than 10% in certain cases. Given the significance of auditing in instilling confidence in global markets, these firms bear a responsibility towards investors, governments, the profession, and other stakeholders. Nevertheless, these four firms continue to audit the majority of listed companies globally. Alarmingly, many of their audit clients pay substantially higher fees for non-audit services compared to audit fees. The sheer scale and nature of these non-audit services, such as systems design and implementation, strategic consulting, and outsourced service provision, pose considerable risks to audit independence. Additionally, the relatively small size of the audit practices within these firms can impact audit quality. This situation is not unprecedented and was exemplified by the collapse of Arthur Andersen two decades ago. Notably, the consulting arm of the former firm continues to operate today as Accenture, Protiviti, and other smaller entities, albeit without any substantial external audit involvement.

The Audit Profession

The challenges currently faced by these firms arise from their sheer magnitude. As organisations expand to such an extent within their respective markets, growth becomes increasingly arduous. In such circumstances, individuals may inadvertently or deliberately make decisions or errors that can tarnish the image of the accounting and auditing professions. This negative publicity hampers the attraction and training of competent auditors. For instance, in Australia, the number of registered auditors has plummeted to around 3,000, whereas a decade ago, there were over 6,000.

We firmly believe that the profession must counteract these issues and that there is a place for ethical, independent audit firms with a steadfast commitment to quality and career progression.

LNP Audit + Assurance

We believe that our structure, governance and the markets that we operate in address the aforementioned risks and foster an environment conducive to attracting top-tier professionals to build their careers with us and foster our firm’s sustainable growth.

The key elements of this are:

Ownership and control by auditors: LNP is owned and controlled by auditors, ensuring a focus on the values and principles of the profession.

• Specialisation in audit and assurance: We exclusively specialise in audits and related work, abstaining from providing consulting or other services that could compromise our independence during the audit process.

• Non-engagement in government work: We do not undertake government projects to avoid potential conflicts of interest.

• Independence from foreign head offices: LNP is not beholden to a foreign head office, thereby enhancing our autonomy and ability to maintain integrity.

• Market specialisation: Our firm focuses on specific markets, including financial services and rapidly growing entities, enabling us to leverage our expertise effectively.

• Sustainable growth: We prioritise sustainable growth rather than pursuing expansion for its own sake, prioritising the long-term aspirations of our team members.

In summary, our approach at LNP aims to proactively avoid potential pitfalls rather than simply managing them. We firmly believe that through our diligent structuring, we have mitigated risks and maximised quality and ethical conduct to the best of our ability and that our structure and operations maximise the interests of our staff, clients, the accounting profession, and all other stakeholders.